Union decline and rising inequality in two charts

One hallmark of the first 30 years after World War II was the “countervailing power” of labor unions (not just at the bargaining table but in local, state, and national politics) and their ability to raise wages and working standards for members and non-members alike. There were stark limits to union power—which was concentrated in some sectors of the economy and in some regions of the country—but the basic logic of the postwar accord was clear: Into the early 1970s, both median compensation and labor productivity roughly doubled. Labor unions both sustained prosperity, and ensured that it was shared. The impact of all of this on wage or income inequality is a complex question (shaped by skill, occupation, education, and demographics) but the bottom line is clear: There is a demonstrable wage premium for union workers. In addition, this wage premium is more pronounced for lesser skilled workers, and even spills over and benefits non-union workers. The wage effect alone underestimates the union contribution to shared prosperity. Unions at midcentury also exerted considerable political clout, sustaining other political and economic choices (minimum wage, job-based health benefits, Social Security, high marginal tax rates, etc.) that dampened inequality. And unions not only raise the wage floor but can also lower the ceiling; union bargaining power has been shown to moderate the compensation of executives at unionized firms.

Over the second 30 years post-WWII—an era highlighted by an impasse over labor law reform in 1978, the Chrysler bailout in 1979 (which set the template for “too big to fail” corporate rescues built around deep concessions by workers), and the Reagan administration’s determination to “zap labor” into submission—labor’s bargaining power collapsed. The consequences are driven home by the two graphs below. Figure 1 simply juxtaposes the historical trajectory of union density and the income share claimed by the richest 10 percent of Americans. Early in the century, the share of the American workforce which belonged to a union was meager, barely 10 percent. At the same time, inequality was stark—the share of national income going to the richest 10 percent of Americans stood at nearly 40 percent. This gap widened in the 1920s. But in 1935, the New Deal granted workers basic collective bargaining rights; over the next decade, union membership grew dramatically, followed by an equally dramatic decline in income inequality. This yielded an era of broadly shared prosperity, running from the 1940s into the 1970s. After that, however, unions came under attack—in the workplace, in the courts, and in public policy. As a result, union membership has fallen and income inequality has worsened—reaching levels not seen since the 1920s.

By most estimates, declining unionization accounted for about a third of the increase in inequality in the 1980s and 1990s. This is underscored by Figure 2, which plots income inequality (Gini coefficient) against union coverage (the share of the workforce covered by union contracts) by state, for 1979, 1989, 1999, and 2009. The relationship between union coverage and inequality varies widely by state. In 1979, union stalwarts in the northeast and Rust Belt combined high rates of union coverage and relatively low rates of inequality, while just the opposite held true for the southern “right to work” states. A large swath of states—including the upper Midwest, the mountain west, and the less urban industrialized states of the northeast—showed lower-than-national rates of inequality at union coverage rates a bit above or a bit below that of the nation. More importantly, as we plot the same relationship in 1989, 1999, and 2009, those states move as a group towards the less-union coverage, higher-inequality corner of the graph. The relationship between declining union coverage and rising inequality is starkest in the earlier years (between 1979 and 1989). After 1999, union coverage has bottomed out in most states and changes in the Gini coefficient at the state level are clearly driven by other factors, such as financialization and the real estate bubble.

Is the result even more dramatic if one removes public-employee unions (teacher, police, fire, etc) from the calculation? I’d argue for the possibility of two effects. First, looking only at non-public-employees, one may see an even more dramatic decrease in unionization. Second, government employees (unionized or otherwise) are generally middle class, removing them from the equation may show even an even greater disparity in the gini coeeficient.

Finally I’d say the phrase “ideally we would be about here, with a healthy share of the labor for represented by unions and a low measure of inequality.” is a bit of a value judgement. Assuming that we all agree that a lower gini coefficient is desirable (I’ll go there!), why is it “ideal” that is correlated with union membership? Wouldn’t a low gini coefficient coupled with low union memebership be just as desirable?

Terry Sheridan

Mr. gates,
I see your final point, inequality is the issue. What feasible methods besides unions lessen inequality? Something along the lines an enlightened employer who treats the employees well, provides things that unions bargain for, and makes a union unnecessary?
What is there?
In this sense, aren’t unions part of a market based solution? They try to get the best price for their members’ labor.

Thomas

I’m making two points here – the first about the detrimental long-term effects on overall employment because of unionization – the second about the flaws in the GINI/unionization correlation.

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I think we can agree that the worst income inequality is having no income. With the inherent monopoly power given to unions, it is clear they extract far more than the labor component otherwise is worth.
This leads to unsustainable balance sheets – more so with the pension plans and health benefits rather than mere hourly wages – especially painfully obvious among public sector labor unions (witness the recent downgrade of Chicago/Illinois).

This in turn inevitably leads to either the outsourcing of the labor component to avoid the extortion (ref the “dead man walking” Northern auto sector and the auto growth in right to work states) or bankruptcy proceedings to get much needed haircuts done (ref. Detroit, Stockton and many other cities bled by public unions).
At the end of the exercise, they have no jobs, living in cities with crumbling infrastructure and dreadful balance sheets – now there’s inequality to worry about.
The only public policy “benefit” from unions appear to be the collective being able to exert more from the shareholders’ earnings than they would have in the aggregate if negotiating as individuals. This “benefit” clearly comes at an extremely high cost (as illustrated in examples above) and could be attained through the political process via capital gains taxation (which is already high enough to dissuade business activities in the USA).
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I also question the correlation btw GINI and unionization (ref Vermont vs Michigan – same GINI in 1979 despite massive unionization difference). More than that, the study is flawed because it isn’t measuring the same people (not even the same groups of people) over time – if the skilled, reasonably high earning middle class (including skilled blue collar workers) deserts the rust belt, then those who remain are the capital owners and those too poor or unskilled to make a move – and GINI goes up by mathematical design.

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